The term insider trading gets thrown around a lot. There’s the movie Wall Street. There’s the podcast The Sure Thing. But what does it actually mean?

Insider trading is when a person uses information not available to the public to buy or sell an asset. This could be done to make a profit OR avoid losses. And, it's illegal.

It is generally done by someone who has behind-the-scenes information about the company (aka, info that isn’t public knowledge) and it is material (ie knowing this info would likely change the price of the shares) 

Give me an example, guys

Let’s just say you work at Jane’s Toy Store, a publicly-listed company. Your company’s arch rival is Harry’s Toy Store (also publicly listed)

On Monday morning, you get an internal (and confidential) email from your boss that mentions that Harry’s Toy Store is looking to acquire your company.

The next day, you buy shares in Harry’s Toy Store because you know that investors will view this information positively and the share price will likely rise. 

Once the acqusition goes through, you sell your shares in Harry’s Toy Store for a $50,000 profit.

Let’s break it down:

• The information you had was inside information (ie not generally available)
• It was likely to have a material effect on the price of the shares (ie it would influence people in deciding whether to buy or sell the shares)
• You bought the shares based on the confidential information
  

This is likely to be deemed insider trading. And not only can you be fined for it - you can even be thrown behind bars.

But can’t I buy and sell shares in the company I work at normally?

You can! But not based on material and non-public information you receive because of your position at the company.